Surely you’ve seen the recent headlines. The Consumer Financial Protection Bureau (CFPB) is cracking down on mortgage companies for unfair and deceptive advertising practices. These companies are incurring multi-million-dollar fines for improper advertising. Understanding the rules is critical. Here’s an overview of what you need to know about REGULATION N: Mortgage Acts and Practices (Advertising) to stay out of the headlines.
Regulation N Defined
Regulation N is a CFPB regulation that is intended to ensure that mortgage credit is not advertised in a misleading manner and that there are no material misrepresentations made – either explicitly or implicitly – about any term or mortgage credit product in a commercial communication (advertisement).
Under Regulation N, it is unlawful to:
- Misrepresent the amount of interest a consumer will be charged, including any misrepresentations of, or failure to disclose, negative amortization.
- Misrepresent the APR, simple interest rate, periodic rate or any other rate. (This is also prohibited separately in Regulation Z.)
- Fail to disclose whether separate payment of taxes or insurance is required or misrepresent the extent to which those payments are included in the consumer’s mortgage payment or loan amount.
- Misrepresent the existence, amount or duration of a prepayment penalty.
- Using the word “fixed” to describe an ARM, unless the term “Adjustable Rate Mortgage” is clearly used before the term fixed and it is obvious that the loan is an ARM. (For example, you can’t advertise a “five-year fixed” unless that really is a loan that amortizes over five years with no rate change. You can, however, advertise “an adjustable rate mortgage with an initial fixed rate period of five years after which time the interest rate may adjust once per year.”
- Misrepresent the type of mortgage credit product. For example, it is illegal to lead a customer to believe that a balloon loan is a fully-amortizing mortgage.
- Misrepresent the amount of the loan, or the amount of cash or credit available to the consumer, including claiming that no payments are required in a reverse mortgage. (The payment is made when the loan matures, and the borrower can also make payments at any time during the term.)
- Advertise or imply that the mortgage company or loan product is sponsored by or affiliated with the government.
- Insinuate that the advertisement in question is coming from the borrower’s current servicer when it is in fact not.
- Tell consumers that they are pre-approved or guaranteed for a loan when that is not true.
- Promise a refinance or loan modification unless that refinance or modification has actually been underwritten and approved and cannot change.
Finally, under Regulation N, all advertisements must be retained by the lender for a period of 24 months after their last publication or broadcast.
Helpful Hint for Prospective MLOs
If you’re thinking of becoming a loan officer, you will need to know Regulation N for the National SAFE mortgage loan originator exam. This is the licensing test that prospective loan officers need to pass to become a state-licensed mortgage loan originator. For more help preparing for the NMLS / SAFE test, try out these free practice tests.
Real Estate Institute encourages all readers to consult with a qualified attorney on all matters of law or regulation, as no blog post can or should be a substitute for competent legal counsel.